In October, the Department of Labor (DOL) issued a proposed rule for Definition of “Employer” under Section 3(5) of ERISA – Association Retirement Plans and Other Multiple-Employer Plans.
Retirement plan industry stakeholders were surprised and disappointed that the proposed rule fell short of allowing for open multiple employer plans (MEPs), which would not require that participating employers be related in some way. The DOL’s proposed rule did open the door for professional employer organizations (PEOs) to offer association retirement plans, but this still requires employer members of the plan to have contractual relationships with the PEO. The proposal did nothing to eliminate common nexus requirements—such as industry or geography—currently imposed on closed MEPs.
Many industry groups that submitted comments argued that the plain language of Section 3(5) of the Employee Retirement Income Security Act (ERISA) indicates non-related employers could participate in MEPs. For example, Lynn D. Dudley, senior vice president, global retirement and compensation policy, American Benefits Council, wrote: “The majority of the conditions that the proposed regulation would impose on such ‘bona fide’ groups or associations do not have a basis in the statutory language of ERISA, which means that the Department has authority to greatly expand the use of MEPs by employer groups and associations beyond what is set forth in the proposal.”
Commenters point out that Section 3(5) of ERISA defines “employer” as: “any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity.” In his comment letter, Tim Rouse, executive director of The SPARK Institute, wrote: “Thus, any person that acts indirectly in the interests of an employer in relation to an employee benefit plan is considered an employer. This includes a ‘group or association of employers acting for an employer in such a capacity,’ but is not limited to such a group or association. In short, the minimum needed for an entity to be considered an ‘employer’ is that the entity (a) acts indirectly in the interest of an employer and (2) does so in relation to an employee benefit plan.”
With this in mind, Rouse recommended that the proposed rule be expanded to allow financial institutions to sponsor association retirement plans. The preamble to the proposal acknowledges that in “a broad colloquial sense, it is possible to say that commercial service providers, such as banks, trust companies, insurance companies, and brokers, act ‘indirectly in the interest of’ their customers, but that does not convert every service provider into an ERISA-covered ‘employer’ of their customer’s employees.”
Rouse says The SPARK Institute agrees that service providers are not automatically an “employer” with respect to the plan, but adds that “there is nothing in ERISA that prohibits a service provider from agreeing to take on the role of a plan sponsor. And if a service provider agrees to act as plan sponsor, then it is perfectly correct to say that the service provider is ‘acting indirectly’ for the employer in relation to the plan. In fact, that’s the most natural conclusion to draw from the plain language of the statute.”
A couple of commenters, including Aliya Robinson, executive director for retirement policy at the U.S. Chamber of Commerce, encouraged the DOL to consider including the requirements for a pooled provider that are spelled out under the Retirement Enhancement and Savings Act of 2018 (RESA). One element that RESA addresses and the DOL’s proposal doesn’t is the “one-bad-apple rule,” whereby every employer is jointly liable for the qualification failures of every other employer in the MEP. The rule is not within the jurisdiction of the DOL, so Robinson encouraged “the Treasury Department and Internal Revenue Service to address this issue as quickly as possible.”
The Investment Company Institute (ICI) also encourages the DOL to expand its proposal to allow financial institutions to sponsor MEPs, saying, “The Department’s narrow interpretation cannot be reconciled with its prior interpretations regarding state-run MEPs.” ICI noted that it previously questioned whether the special treatment conferred on states for purposes of sponsoring open MEPs is justified. “As we noted in our January 2016 comment letter relating to the IB [Interpretive Bulletin], the IB appears to make unsupported assumptions about a state’s qualifications, expertise, and ability to operate free of conflicts in offering private-sector retirement solutions,” wrote counsel for the ICI.
Several commenters argued that without changes, the proposed rule would have little impact on expanding retirement plan coverage for American workers—the aim of President Donald Trump’s executive order issued in August, calling on the DOL to consider the pros and cons of allowing small businesses to jointly offer retirement plans.Comment letters to the DOL can be accessed here.
« Evaluating Financial Wellness in 2018